Cable Operators

Telecom: Key To Rural Happiness

3/27/2005 7:00 PM Eastern

Sikeston, Mo.— Small cable operators like Tom Gleason Jr. dispute the notion there isn’t an appetite for advanced services, such as high-speed Internet or HDTV, in rural areas.

He knows otherwise.

Gleason, executive vice president of NewWave Communications, recalls a visit to a subscriber at a tiny cable system in Missouri. Gleason had to walk across a wood board to get the customer’s house, because the front porch had rotted off. He entered a 10-by-10 room that contained a bed and a huge entertainment center, and was greeted by an old woman and an overweight man.

The man had been watching TV on his state-of-the-art Hewlett-Packard computer, in HDTV. The computer had a thumb reader, so the man didn’t even need to use a password to get into it, Gleason said.

Meanwhile, the older woman explained that the quilts Gleason saw hanging on the wall were to help keep the house warm. There was a small space heater in the corner.

The pair may have been living rather frugally, but they didn’t scrimp on their bundle of cable services. The man, whose monthly NewWave bill is $150, ordered up two unlimited long-distance lines.

“This guy is just sitting there and he is just as happy as a lark,” Gleason said. “That’s your story of rural cable.”

That’s why the three small cable operators based in Sikeston — NewWave, Galaxy Cablevision and SEMO Communications Corp. —- share an overall game plan. The linchpin: Offer consumers in the isolated heartland a bundle of services – video, high-speed Internet, digital and now voice – at an attractive price.

There is a demand for such services outside the metropolitan areas, attests both Gleason and Larry Eby, Galaxy’s executive vice president.

DEMAND BEYOND CITIES

“In these small towns, there’s not much to do,” Eby said. “That guy [that Gleason described] doesn’t leave his house much.”

Sentiments like that help keep small operators — competing head to head against direct-broadcast satellite and now the telephone companies — bullish on the future.

Now there’s more than just the video revenue stream to turn to — just like the big MSOs.

“I don’t think any of us look at ourselves as being in just the cable business,” SEMO president Tyrone Garrett said. “We look at it as being in the communications business. While video is a very important part of our business, and will be for a long time, we’re morphing into data, phone, and other things we can do with our infrastructure that we wouldn’t have envisioned five years ago.”

That’s a sentiment echoed by James Gleason, NewWave’s president and chief operating officer and Tom Jr.’s brother.

“We think you need all those services on to be able to be competitive telecommunications provider,” he said. “Bundling is key.”

Beyond selling the vaunted bundle, Galaxy, SEMO and NewWave each have their own unique twists, in terms of their strategies.

MARKETING NON-SUBS

Galaxy, for example, is successfully marketing services such as high-speed Internet to non-cable subscribers, in addition to its own customers.

“About 18% of our modem customers are people who don’t buy anything from us except modem service: A year ago that number was 10%,” Eby said. “So we’re going and getting some money from people that have a dish, that’s the easiest way of putting it — people that we put infrastructure in front of that we weren’t getting otherwise.”

SEMO — an acronym for “Southeast Missouri” — has fiber-connected and collapsed the headends for all of its half-dozen tiny systems into one state-of-the-art headend.

At its peak, SEMO had 10,000 subscribers. Then it sold off all but roughly 2,000 of them, and had to decide how to proceed.

“We enjoyed the business,” Garrett said. “We wanted to stay in it. But we were going to have to be prepared for some future services. … The only way to do that was to have one master headend running the plant.”

NewWave’s tack is to open local offices, with seven now up and running. Walk-in customers not only can pay their bills there, but also see demonstrations and get explanations about often complicated new products and services, like data and HDTV.

“EchoStar [Communications Corp.] and DirecTV [Inc.] don’t have offices in these towns, nor a place to pay your bill,” Jim Gleason said. “SBC, who’s the phone company here, BellSouth, who is in Tennessee — they don’t have any local presence in these communities anymore. So if we want to find a key differentiating factor, that’s going to be one of them.

Launching phone service, using VoIP, or voice-over-Internet protocol, is a crucial part of the bundle.

Phone service is an attractive lure in rural areas, where sometimes the telco considers any call out of town a long-distance call.

“In Campbell, Mo., the only place you can call that’s not long distance is Campbell, Mo.,” Jim Gleason said. That should add luster to a NewWave package that includes regional calling.

NO DSL VS. SEMO

Most areas SEMO serves are so small they don’t even have digital subscriber line service yet, according to Garrett. So he’s upbeat about offering a “triple play” bundle.

“We’re pretty excited because we’re going to have some pretty aggressive promotions going with that — an expanded basic, digital, phone and Internet bundle” with a number of variations, Garrett said. “We will have a price point under $100 for video, data and phone, depending on what package.”

NewWave can’t keep up with the demand for its recently launched phone service, according to Tom Jr.

SEMO plans to start testing phone service this month and roll it out by May 1.

Galaxy, which has 55,000 subscribers in 14 states, is in the process of choosing a VoIP partner, according Eby, with launch planned for later this year.

The Gleasons started their 20,000-subscriber company by acquiring systems in Missouri, Tennessee, North Carolina and South Carolina in 2003. Wachovia Capital Partners is the company’s majority owner, and NewWave is spending $16 million to upgrade the systems which were in pretty poor shape, the Gleasons said.

NewWave’s biggest property is a 6,500-subscriber system in Dexter, Mo. The plan is to serve towns of 5,000 or more with headends that have at least 1,500 to 2,000 subscribers.

“We think we can do, in that size of headend, the full play of services,” Jim Gleason said. “In Dexter, we have a robust expanded basic lineup. We have digital cable. We’ve got high-speed Internet in both, a residential and commercial offering.

“We’re offering high-definition, and have 11 channels of high-definition programming on. And we’re offering telephone service. … The only thing we don’t have a plan for now is video on demand, and that’s probably because it’s simply a headend-size issue.”

NewWave is also rolling out DVRs, a product Galaxy also likes.

AVOIDING PITFALLS

The Gleason brothers are assiduously trying to avoid the challenge they faced when they ran Galaxy, which filed for Chapter 11 bankruptcy protection in 2001.

They left Galaxy — which had 200,000 subscribers at its peak — in 2001. Galaxy emerged from Chapter 11 protection three years ago, with Cerberus International Ltd. and Cerberus Partners as majority owners.

During the mid-1990s and early 2000s a number of cable operators that owned tiny rural cable systems spread out over many headends — Galaxy, Classic Cable and Mallard Cablevision LLC — all eventually filed for Chapter 11.

“At Galaxy we were running fiber all over trying to tie these towns together and make them look like bigger ones,” Tom Jr. said. “It worked in Nebraska, where we built about 800 miles of fiber network and tied 30 communities. But the capex involved in that was just too high on a per-sub basis.”

Back then the technology for advanced services that generate incremental revenue — digital video and high-speed Internet — either wasn’t available or was too pricey for tiny cable systems, Jim Gleason added.

During this period, direct-broadcast satellite also arrived as a tough competitor — all told, a pathway to Chapter 11.

NewWave, which is on the lookout for acquisitions, now plans to pass on systems that have fewer than 2,000 subscribers per headend. “We’re not going to fall in that trap again,” Tom Jr. said.

POSITIVES AT GALAXY

Galaxy, which emerged from bankruptcy protection two and a half years ago, has upgraded and rebuilt a number of systems, and now has positive cash flow and even free cash, according to William Chain, its CEO and a partner at Anchor Pacific Group, which manages the MSO for Cerberus.

Galaxy has also managed to pay off some senior and subordinated debt “before we had to,” Chain said.

Galaxy’s primary focus is to continue deploying HSI and to roll out DVRs and HDTV, according to Eby.

“We’ve done lot of research on why people left us to go to DBS, and the DVR is still the way to get those customers back,” he said.

Galaxy is also targeting “the dial-up guys” by offering a 64 Kbps service for $13.95, versus the average $20 for dial-up, according to Eby.

The small-cable business, because of its VoIP play now, is once again attracting venture capital money, the Gleasons say.

“The phone companies wouldn’t want to be in our end of the business if, 'A,’ theirs was so secure and, 'B,’ ours wasn’t pretty attractive,” Jim Gleason said. “It looks much better now than it did five or six years ago.”

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